Updated: Dec 7, 2021
Can you name the top three market timers of all time (no Googling)?
Okay, just name one.
No one?! (If it makes you feel any better, I couldn’t think of any names either).
There is a reason for that.
Now give this a shot: name the top three investors of all time.
I’m going to go out on a limb here and say Warren Buffett, Benjamin Graham, Peter Lynch, maybe sir John Templeton or a host of others. No market timers on that list!
You can Google sell signals, market signals, and market timing and find no shortage of information from self-proclaimed "experts" on how to beat the market.
Timing the market
Market timing is great if you have a crystal ball, otherwise you may find yourself selling out at the wrong time, and getting back in too late. This may tempt you to swing for the big return home run - to make up for previous losses.
This can mean taking on more risk than you are aware of or comfortable with. A bull market can hide this extra risk and look awesome, until the market drops! Those signals better have a good track record! How have they done in past market drops?
Tax Planning (Wrong Department)
Frequent "signals" means frequent short-term trading. This is very tax-inefficient, causing short term capital gains which are taxed at your highest marginal income tax bracket (and rates are likely going up).
Also if you violate the Wash Sale Rule, short term losses are disallowed, ouch! High taxes alone can make this strategy not worth it - just ask your CPA. Unless of course you are feeling very patriotic and love paying taxes!
Also, the more you trade, the more you are out of the market missing out on potential upside, not to mention any ticket charges.
Big swings in your portfolio? Market signals can make you feel overconfident to your exposure to stocks. Get your portfolio analyzed for the risk speed you are traveling at. Do this before the next market downturn!
Very risky if the “signals get crossed" and you are in retirement.
You don’t want to hear your advisor tell you everything is going to be okay, you just have to go back to work!
Many market signals are not effective. What is effective is the marketing material put out on these strategies. If the "experts" were really good at this, would they be helping you or running a tax haven in the Cayman Islands?
This is not to say that there is no way to manage risk in the market, as there are ways to do so without lots of trading. Just remember no method is perfect.
I am interested in your thoughts if you use a strategy like this, and how it has worked in market downturns.
Just email me at email@example.com
John Piershale, CFP®
John Piershale Wealth Management, LLC is an Investment Adviser registered with the State of IL and in other jurisdictions where exempt from registration. All views, expressions, and opinions included in this communication are subject to change. This communication is not intended as an offer or solicitation to buy, hold or sell any financial instrument or investment advisory services. Any information provided has been obtained from sources considered reliable, but we do not guarantee the accuracy or the completeness of any description of securities, markets or developments mentioned.
The information contained herein is intended to be used for educational purposes only and is not exhaustive. Diversification and/or any strategy that may be discussed does not guarantee against investment losses but are intended to help manage risk and return. If applicable, historical discussions and/or opinions are not predictive of future events. The content is presented in good faith and has been drawn from sources believed to be reliable. The content is not intended to be legal, tax or financial advice. Please consult a legal, tax or financial professional for information specific to your individual situation.